Market Temperature: Warming

M&A activity picks up steam. Buyers and sellers capitalize on favorable market conditions.

By  Audra M. Szollosy

All those seven-course deals are finally coming to a close with a fine dessert—check, please! June M&A activity didn’t vary from the previous four months, but July deals broke the 20 mark. June activity hovered at 16 deals. July, with 21, made it the second most active this year. As we’ve been predicting for several months, M&A activity has begun to pick up in the second half of the year.

The market barometer tops out at 125 transactions through July compared to 109 this time last year. A total of 54 deals was announced from May to July, not as many as in the first quarter, but a 15% increase in activity over the three-month period in 2009.

Don’t expect insurance brokerages, which accounted for 86% of all deal activity, to be dethroned as the dominant acquirer. Insurance brokerages appear to be in vogue again for private equity investors. With better access to capital, beaten up profitability on part of the brokerage, and the hard market on the horizon (not really, but it sounds good), what’s not to like?

A recap of our scorecard leaders goes as follows: Brown & Brown and Arthur J. Gallagher continue to lead all deal makers this year with 11 and 10 deals respectively. Negative organic growth quarter-over-quarter is likely one reason Brown & Brown and Gallagher have been so acquisitive. Hub International trails in the distance with four—all announced in June and July.

Consolidation among the biggest wholesalers continued in July when Cooper Gay and Swett & Crawford made their merger official. The combination creates a global wholesale and reinsurance brokerage with roughly $3.5 billion in worldwide premiums. This mega merger comes just a few months after the AmWINS Group/Colemont Insurance Brokers deal. Aside from Crump’s purchase of Bisys’s Insurance Services Group and Retirement Services business in 2007, there hasn’t been any consolidation among the top 10 wholesale brokerages (as defined by total premium volume) until now. The persistent soft market has made timing for acquisitions and mergers just right for some, especially in the wholesale sector.

On a lesser scale, another wholesale brokerage, once the acquirer, has found itself the acquired. Preferred Concepts announced in June it had acquired Mercator Risk Services. Both are investments of Trident III, a private equity fund managed by Stone Point Capital. Just two years ago, Mercator was on the scoreboard as an acquirer.

R-T Specialty, a subsidiary of Ryan Specialty Group, a new wholesaler formed by industry veteran and former CEO of Aon Corp. Patrick Ryan, made its first acquisition in July with the purchase of Chartwell Independent Insurance Brokers, a national wholesale/intermediary organization with expertise in tough-to-place property accounts.

On the retail side, another start-up, The Hilb Group, announced its first two acquisitions. The new Richmond, Va.-based firm is being led by Hilb, Rogal & Hobbs’s founder Robert Hilb and his son. HRH was acquired in 2008, many years after Robert Hilb’s retirement.

One common sentiment shared by start-up founders and big deal makers is that they’re taking advantage of what they feel are favorable market conditions. (Tea leaf reading: Several have taken it on the chin. It’s a great time to buy.) But don’t think these sellers are going for a song and a prayer. Pricing has firmed and increased from the lows. Just one more piece of the puzzle driving M&A activity.

Previously dormant acquirers in employee benefits are reappearing from the shadows. Activity in the benefits space continues to increase. We believe there will be above average consolidation in this agency category, especially through year’s end. With its largest acquisition, at $4.9 billion in deal value, Aon Corp. acquired global consulting company Hewitt Associates and will rival insurance brokerage Marsh & McLennan’s consulting division, which includes Mercer and Oliver Wyman.

If you’ve been snoozing while reading up on M&A activity, it’s time to wake up. The second half of the year is going to be full of fun.